Is your company in trouble? How can you tell? It may seem obvious, but even if you own the company, it can be difficult to know just where you stand. Troubled companies have warning signs which are consistent across industries. Here are things to look for within key functional areas of your business to determine if your business may be in trouble.
- Reduced Liquidity: Liquidity is the ability of a company to quickly convert assets to cash so it can pay its bills and meet other debt obligations. Lack of liquidity and cash flow are the #1 reasons why most businesses fail. Is your company maxing out its line of credit? Are you having trouble paying bills or unable to meet the company’s debt obligations? Are you constantly holding checks until there is enough cash to cover them? If so, you have a liquidity challenge. See our blog article “Preserving and Improving Liquidity During a Crisis” for more information.
- Ongoing Losses/Reduced Retained Earnings: Retained earnings are an accumulation of profits and losses over a period of time. A negative retained earnings account on the balance sheet can reflect continuing losses and an inability to reinvest in the company. Does your company have ongoing losses each month? Is your retained earnings account on your balance sheet dwindling or becoming negative?
- Debt/Leases: There are metrics and ratios to measure a company’s ability to cover its debt obligations. One metric is the current ratio (cash ratio), which determines if a company can pay short-term debt obligations. It is calculated by dividing current assets by current liabilities. A ratio higher than one indicates that the company will be able to pay off its debt. A ratio less than one indicates that a company will not be able to pay off its debt. Do you regularly review key financial metrics such as the cash ratio? Is the trend of your metrics and ratios over time positive or negative? Do you have a high concentration of leased assets because you cannot secure traditional financing?
- Financial Records: Profit and loss statements should be prepared and reviewed at least monthly. An effective rolling 13-week cash flow forecast should be prepared and reviewed weekly. Are monthly financial statements being completed within a timely manner (example 5 business days)? Is financial reporting accurate, relevant, and timely? Is management using this information to make decisions? Are payments and invoices being entered into the company accounting system at least weekly?
- Ratios/Trends: Look at the company’s income statement with at least 12 months of history and group costs into three categories – sales, variable costs, including direct sales costs, and fixed costs. What are your trends? Perform a breakeven analysis. What is your contribution margin? Is it declining? What is your EBIT?
- Inventory: Inventory ties up cash or borrowing availability while the company is waiting to convert and/or sell the inventory. Are you tracking days of inventory on hand or other key metrics related to inventory? Are you regularly reviewing inventory levels and taking actions to reduce inventory where appropriate? Do you measure excess and obsolete inventory levels? Are these numbers trending up or down?
- On-Time Delivery: Delivery issues to customers can be an indicator of a problem with your operational leadership, equipment, or internal processes. Do you have internal metrics that track on-time delivery? Are these metrics reviewed frequently, and are corrective actions taken and documented? Are you regularly missing your monthly revenue forecasts? Have customers threatened to pull business due to delivery issues?
- Physical Assets, Facilities, and Equipment: A company’s assets require preventative maintenance programs to keep them operating at peak efficiency. Has the company been deferring maintenance on equipment due to cost concerns? Are the assets deteriorating due to the company’s inability to reinvest in them through maintenance and upkeep? Has the company’s capacity shrunk due to unrepaired equipment?
- Quality Issues: Ongoing quality issues with your product is indicative of a breakdown in your equipment or internal processes. Do you have internal metrics that track quality? Are these metrics reviewed frequently, and are corrective actions taken and documented? Are you receiving quality notices from your customers on a regular basis? Is your internal cost of scrap continually high? Have customers threatened to pull business due to quality issues?
- Company Leadership: Effective leadership in a crisis is about setting a clear strategy and plan, ongoing communication with stakeholders about the plan, and effective execution of the plan. See our blog article – “Effective Leadership in a Crisis”. Leaders must accept responsibility for current conditions and look for solutions. Is your company leadership defensive and ignoring negative information? Is there a lack of accountability within the leadership team? Does leadership place blame on others for current challenges? Has a clear vision of how to move forward to address and resolve current challenges be developed and communicated to key stakeholders?
- External Communication: Regular communication with your external stakeholders (ex lenders, vendors, customers, etc.) is needed to maintain credibility and trust. Are you regularly communicating with your key stakeholders? Do you have credibility problems with your key stakeholders? Is your company facing mounting pressure of litigation? Are your vendors threatening to stop shipments of supplies to you? See our blog article “COVID-19 Advice – Banking Relationship” for more information on communicating with your lender.
- Internal Communication: Regular communication with internal employees helps the company to move forward in the same direction, towards the same vision. Is there a rhythm for regular internal communication with employees (not just managers)? Are employee questions being answered? Is leadership encouraging feedback from employees?
- Loss of Key Employees: Often, when a company is starting to experience distress, senior members of management may leave to take jobs elsewhere. Departments like finance, purchasing, quality, or sales may begin to feel the additional stress of upset customers or suppliers before the rest of the company is aware or the results are visible on financial reports. This results in current employees with less experience filling these key positions, which obviously does not help a troubled company. Does the company have the inability to pay talent or maintain an attractive work environment? Is there a loss of institutional knowledge or lack of trust in the company?
A troubled company often exhibits some combination of the factors described above. If your company is exhibiting some combination of the factors described above, then call us. You are not alone. We can help. At DWH, we’re here for you, even remotely. Please feel free to reach out.
This post was written by Heather Gardner
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